Wall Street firms may be facing suits over Enron situation

Published: Sunday, February 24, 2002

ALAN CLENDENNINGASSOCIATED PRESS

NEW YORK  Top Wall Street firms that arranged loans for Enron Corp., sold its bonds or helped set up transactions for the energy giant face a growing number of lawsuits claiming they share responsibility for the huge losses caused by its collapse. While the firms potentially could have to pay hundreds of millions of dollars in damages, legal experts say it will be extremely difficult to prove allegations of complicity by Wall Street executives in Enron's downfall. But the claims in the lawsuits filed in recent weeks might be a prelude of sorts to the anger investment bankers could hear next month when Congress widens its probe of Enron to determine what role, if any, the investment firms had in the company's demise. Investors' fears about the impact of the investigation helped drive stocks sharply lower this past Tuesday, sending the Dow Jones industrials down more than 150 points and pushing the Nasdaq composite index to its lowest close this year. Enron's big financial backers and investment advisers contend they did nothing wrong, but the lawsuits say Wall Street executives either knew or should have known that the web of financial transactions and partnerships Enron used for years to mask debt and boost profits could suddenly implode. "People are looking under the covers of all of these deals because none of these companies could have existed without the financing from Wall Street," said Joseph Cotchett, who filed a federal lawsuit in New York against the investment banking division of Citigroup Inc., Goldman Sachs & Co., Banc of America Securities and former Enron auditor Arthur Andersen. Cotchett's clients, a group of investors based in Toronto and the Cayman Islands, say they lost more than $120 million after buying Enron bonds last October, less than two months before Enron filed for bankruptcy protection. While troubling news had already broken about Enron's finances, Cotchett said his clients decided to purchase the bonds after the Wall Street firms' brokers insisted the investments were a good buy because Enron's problems were overblown. "They said 'Don't worry, we've checked into it, this is a fabulous time to get in,' " Cotchett said. Analysts for the firms were also pitching Enron stock at the same time. A Goldman Sachs research note issued to clients on Oct. 9 said Enron was "still the best of the best" and predicted the company's shares  down about 60 percent for the year at the time  would rapidly regain the lost ground. A spokesman for Citigroup said the lawsuit has no merits, a spokeswoman for Banc of America declined comment and a spokeswoman for Goldman Sachs didn't return a telephone message seeking comment. But the firms probably have a solid defense to rebut the lawsuit, said David Lipton, a law professor specializing in securities laws at Catholic University of America School of Law in Washington, D.C. "The argument that the underwriters are going to put forward is, look, everyone was bamboozled by Enron and we did our due diligence," he said. "That's a tough one to fight and a tough one to overcome." In another lawsuit, one of Italy's largest banks questions the multiple roles J.P. Morgan Chase & Co. and Citigroup had in providing investment banking services to Enron while also serving as lenders. The lawsuit accuses the banks of having multiple conflicts of interest in their dealings with Enron, saying they knew or should have known the company was in deep trouble in October when it drew on a syndicated financing arrangement set up by J.P. Morgan and Citigroup. Unicredito Italiano, which said it lost $22 million, claims the banks failed to disclose that Enron was being investigated by the Securities and Exchange Commission and that Enron needed the money to satisfy obligations on its partnership deals, some of them involving the banks. "Within five weeks of the fraudulent misrepresentation to (Unicredito), Enron filed for bankruptcy," the lawsuit said. Unicredito said it "has now learned of Enron's fraudulent financial statements and the defendant banks' fundamental and conflict-ridden role in the failures of their longtime partner, client and borrower, Enron." Spokesmen for J.P. Morgan and Citigroup  which are also two of Enron's biggest creditors  said the lawsuit is without merit, declining to comment further. But another legal expert said proving the claims will be difficult. To do so, Unicredito will have to prove the banks "made loans that no reasonable bank would have made and they did it without proper investigation and they did it for the purpose of propping up Enron so they could get more business out of Enron," said Lawrence Mitchell, a corporate law professor at The George Washington University Law School. Even if the lawsuit is settled for tens of millions of dollars or more, it wouldn't hurt the banks much because they are so large, said Mitchell, the author of "Corporate Irresponsibility: America's Newest Export." "It's a little more than chump change, but not a lot," Mitchell said.